The Bank of Israel Monetary Committee, headed by Governor Amir Yaron, today defied market expectations and cut the bank’s key interest rate by 0.25% to 4%. The Bank of Israel said, "Economic activity continues to expand, with a slight easing of labor supply constraints, and a decline in the inflation environment. During the reviewed period the shekel continued to strengthen, and Israel’s risk premium is close to its prewar level." Before the decision was announced the shekel continued to strengthen against the US dollar with the exchange rate reaching NIS 3.15/$.
Yaron explained to "Globes" why there was currently no reason to intervene in the foreign exchange market, criticized the government's actions in the fight to reduce the cost of living, and commented on renewed tensions between the Ministry of Defense and the Ministry of Finance on the defense budget.
When will you intervene in the foreign exchange market to curb the appreciation of the shekel? Is there a point that you have marked?
"We don’t have such a point. We see that exports of services and goods have continued to rise. Our focus in the foreign exchange market is price stability and a well-functioning market."
The governor also addressed the foreign exchange issue at his press conference following the interest rate announcement and said, "Intervention in the foreign exchange market is one tool in the toolbox for achieving the bank's goals, and the emphasis is on maintaining price stability and supporting orderly activity in the market. We constantly examine adjusting the various tools. The context is inflation, and I say that the exchange rate has contributed to the low pass through impact on inflation."
The government has announced measures designed to ease the cost of living. Yesterday, Minister of Economy and Industry Nir Barkat announced a basket of 100 products, and Minister of Finance Bezalel Smotrich has announced a tax exemption on personal imports of up to $150. Do these and other similar measures really lower the cost of living?
"In principle, in order to lower the cost of living, we need to make structural changes. This means lowering barriers to imports, bringing in more players, as we are still an island country. Regulatory restrictions need to be removed and concentration reduced - that's how we need to deal with it. If they think that there’s currently a problem with doing that, and so they proposed this basket, then there are issues here. Will there be a situation of cross-subsidization, in which the basket will be cheap and other products will be more expensive - and will consumers be able to recognize this? We therefore need to make sure that under these mechanisms it doesn't come out as what you gain one way you lose another way."
"Regarding raising the VAT exemption to $150, our recommendation is to reduce the exemption to below what it was before ($75). We think it causes distortions and certainly in the medium term may harm some businesses. There is an issue that, except through Amazon, it is very difficult to import, so that's why they did it. To the extent that this is the problem, it needs to be solved, and the exemption should be lowered."
After the agreements on the state budget, arguments began to develop between the defense and finance ministries over the defense budget. How do you, as the government's economic advisor, see the renewed dispute?
"The defense budget is a very significant component of the overall budget. We all understand this and we all understand that the overall budget is ultimately critical in terms of its impact on the debt, the costs of the debt, and the ability to direct resources to civilian needs - education, infrastructure and so on - without getting into the current debate, which also depends on assumptions about the number of reserve days and whether there are specific events in the geopolitical arena.
"This year, NIS 112 billion was decided upon. We need to find the most efficient way to stay within this framework, and of course, at the same time, from time to time, review the geopolitical situation and see whether the security risks have decreased. Some claim that they have increased, and some that they have decreased. We all understand that we need security for the economy, but the economy also needs security. To the extent that there is a substantive debate, not about another billion shekels here or there, but about our security concept, we need to sit down and sharpen our pencils on this."
In other words, should we stick to the amount that was set?
"If there are any actual security developments behind these demands, then defense officials and the decision makers need to sit down and look at it, but we certainly wouldn't want, as I said, to breach the budget framework right now. Especially when we're around a deficit target of 3.9%, there's great uncertainty regarding security incidents, and we don't fully know what will happen with the taxation from the Wiz deal. Therefore, there's great uncertainty on both the spending and revenue sides."
To what extent did pressures from the real estate market influence the current interest rate decision?
"There’s a mixed picture in the real estate market. On the one hand, you see that there has indeed been a certain decrease in transactions. It’s a degree of decline, and not that dramatic if you take a long view. On the other hand, we see high building start numbers. In the last quarter, we also saw a certain increase in building completions. We therefore see the decline in prices as an adjustment in the market, and we see contractors who have purchased land in Israel Land Authority tenders. There is probably still a process of price adjustment. We constantly examine the strength of the players, and we don’t currently see a high level of arrears on the mortgage side."
Published by Globes, Israel business news - en.globes.co.il - on January 5, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.